Angela from Raleigh, North Carolina asks: Mitch, I’ve seen a lot in the financial news that Trump’s presidency is going to affect certain parts of the markets. For example, I’ve read that Industrials and Defense stocks should do better since Trump is going to expand spending in those areas. It’s making me wonder if my portfolio needs to undergo some drastic changes for the New Year. Can you summarize all of the changes investors should make in light of the Trump presidency?
Mitch: Thanks for your question, Angela. Before I get into some specific recommendations, let me first back up a moment to remind investors of the “order of operation” they should follow when allocating an investment portfolio.
The first order of business is the asset allocation decision. This means deciding what percentage of your portfolio you want to allocate to equities, versus fixed income, versus cash, versus alternates like real estate or MLPs (those are just two examples). Basically, how much of your portfolio do you want to allocate to risk assets versus bonds or cash? This decision depends on how much growth you’re seeking, how many years in your investment time horizon, your tolerance for volatility and downside; and your cash flow needs.
Let’s say your recommended asset allocation is 80% equities and 20% fixed income. We’ll start with the equity portion. From a size perspective, in 2017 we would recommend considering an allocation to each size category – small-cap, mid-cap, and large-cap. We could see small-cap and mid-cap stocks performing well early in the Trump presidency, particularly if expectations for a boost in domestic production continue rising. “America first” policies should tend to help smaller cap companies relative to larger cap ones, something we’ve already seen performance-wise since the election. A stronger dollar would also help domestic companies relative to multinationals.
From a sector standpoint, we could continue to see relatively strong performance from Financials, Energy, and Materials, as each sector could benefit directly from looser regulations and fiscal spending. Industrials and Defense should also feel tailwinds if this administration sees follow-through on some of its proposed policies. In your investment portfolio, you should ultimately gain exposure to all ten sectors in the S&P 500, but you can actively favor some over others.
From a fixed income standpoint, the picture is slightly negative for longer duration bonds. There are conflicting forces that could have an impact on yields this year, so we could envision a year where yields undergo a sort of “tug-of-war” in both directions. Investors may plan for this uncertainty by diversifying across duration, and perhaps having an allocation to investment-grade corporate bonds. If it is income or cash flows you’re trying to generate in your portfolio, you may also consider dividend-paying stocks as a mechanism for doing so. At the time of this writing, the dividend yield on the Zacks Dividend Strategy is currently higher than you’ll get paid on a 30-year U.S. Treasury.
Once you’ve decided your allocation to equities versus fixed income or cash, then you can start making tactical decisions about what sectors, styles, and regions to invest in. Then it’s deciding what stocks or funds to buy. Zacks Investment Management can guide you through each of these decisions, and we’ll manage your portfolio accordingly as conditions in the market change – or as your goals change. Instead of making all of these decisions on your own, you can partner with us.
If your current portfolio is not taking all of these factors into account and you would like to learn more about investment strategies that can meet your specific investing needs, we invite you to download our Dean’s List of Investment Strategies. Our Dean’s Lists outlines five of our investment strategies that are currently ranked in the top 10% of their respective classes according to Morningstar (as of 12/30/16). To learn more, click on the link below or feel free to contact us at 1-800-918-3114 – we’ll help you weigh these factors to determine an asset allocation.
Disclosure